The Value of Open Innovation

When faced with a choice between open innovation and internal innovation, it is seldom a binary choice. They both exist as important and inherently symbiotic strategies that must be pursued together.

However, we are often asked to compare the relative value of open innovation with internal innovation. Therefore in this post we will consider the value of open innovation by using the following common definition:

Open Innovation Value = (Quality + Benefit) / (Cost + Effort)

The Quality of Open Innovation

No matter who you are – whether a multinational corporation, or a small company – the number of people within an organisation are finite. Whereas the number of people outside of your organisation are essentially infinite by comparison.

“There are more smart people outside your company, than within it. It’s the law of numbers. Be adaptive.” Reid Hoffman

Therefore, if we assume that the number of smart people and good ideas are evenly distributed both inside and outside of your organisation, then by definition there are always infinitely more good ideas outside of your organisation albeit with lower (but still finite) relevance. And the one trait of all innovative organisations have is that they have lots of ideas, and so quality comes directly from the quantity.

This effect is magnified by the fact that all organisations tend to suffer to some extent from group-think. Namely that people start to recycle the same ideas, and diversity of perspectives are minimised. This is a natural phenomena in any group and is an important aspect of creating a shared culture, however it can have a negative impact on any organisation’s innovation performance, which is strongly correlated with independence and diversity of thinking.

Therefore the quality of ideas coming from outside of your organisation is greater than those that are internally generated.

The Cost of Open Innovation

Until recently, the cost and hassle of finding the right people externally and the subsequent transaction costs of working with them, were always so much greater than the cost and hassle of working with the right people internally. However in 2016, we would argue that (based on our experience of working with all sorts of organisations, large and small), that because of the internet and globalization, the hassle factor of working external is at worst the same, and often much easier than working internally.

“In closed innovation we would have paid the same amount to get one project to the position the Open Innovation Challenge got four!” Open Innovation Director, P&G

This is because the bureaucracy and the politics of any organisation has it’s own gravitational field which slows down your ability to act. By collaborating externally, what you loose in direct ability to control the actions of a third party you can benefit from the ability to move faster and bypass internal restrictions. Of course this is offset by the fact that level of complexity increases with the number of partners involved as you have twice as many hoops to jump through, but at the same time that gives you an opportunity to avoid the hoops altogether if you navigate them smartly.

And whilst it can be tempting to hope to get something for nothing by collaborating with a third party this almost never works. Only when you avoid the opportunity to rip somebody else off does true collaboration and open innovation really begin. And even if you get away with it the first time, it will be harder to do so repeatedly as word will get around and the market will wise up to the fact that you are not operating equitably.

Therefore the cost of open innovation is typically lower, or equal to the cost of internal innovation.

The Benefit of Open Innovation

People you work with internally are doing so for any number of different reasons, not necessarily because they want to. Again this comes down to politics and positioning, all of which doesn’t enhance the innovation capacity of an organisation.

Whereas external partners are by definition a self-selecting group. They only want to work with you if they actually want to work with you. In other words your external ecosystem is positively motivated to talk to you or work with you, usually because they can see something in what you can offer which they need or want.

The benefit of internal innovation is primarily commercial and cultural. Whereas the benefit of external innovation also includes the positive perception and impact on your brand and reputation, and so also help you with you marketing and PR at the same time.

Therefore the benefits of open innovation tend to be greater than the benefits of internal innovation.

The Effort of Open Innovation

“There ain’t no such thing as a free lunch”

Last but not least, the effort of getting an external or an internal innovation to market is significant and so far we haven’t found that there are any short cuts with open innovation. Successful open innovation, just like successful internal innovation, is hard work. However by virtue of the fact that you have at least two sets of stakeholders overseeing any project, there are more opportunities for project reviews. In both cases, if the stakeholder review process is operating effectively then a project that isn’t going well is more likely to fail fast as a result, thereby sometimes saving effort across the portfolio of projects overall.

The effort of open innovation is on average equal to the effort involved in internal innovation.

In Summary

Open innovation is never a simple substitute for coming up with, and realizing your own ideas. Therefore it will never replace internal innovation, but rather it builds upon it.

In this post we have tried to make the case for the following:

the quality of open innovation is greater than the quality of internal innovation

the cost of open innovation is less than the cost of internal innovation

the benefit of open innovation is greater than the benefit of internal innovation

the effort of open innovation is equal to the effort of internal innovation

Therefore, according to the original Open Innovation Value formula above, the numerator is greater and the denominator is smaller (or equal), and therefore the value of open innovation is greater than the value of internal innovation.

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